BALTIMORE (Stockpickr) -- You may not realize it, but investors hate the stock market right now. That may sound fishy, especially after a five-year rally in the big S&P 500 index, but the numbers tell a different story.
As I write, total short interest for the U.S. market is sitting at the highest levels we've seen since the big stock indices bottomed back at the start of 2009. That's a pretty extreme level, and it means that investors are making some big bets that stocks are headed lower. The good news is that hate can be a pretty powerful market indicator when it reaches extremes -- powerful because it's usually wrong.
That's not just my opinion; the data bear it out as well. Over the last decade, buying the most hated and heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year.
When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to bet on a decline in its share price -- and not many willing to buy. Too much hate can spur a short squeeze, a buying frenzy that's triggered by short sellers who need to cover their losing bets to exit the trade.
One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.